Daily Market Outlook, May 18, 2022

Overnight Headlines

Asian equity markets are mostly higher with the notable exception of Chinese stocks. Investors digested hawkish comments from US Federal Reserve Chair Powell last night who said that interest rates will continue to rise until inflation is falling in a ‘clear and convincing way’ and that the Fed will not hesitate to move rates above their ‘neutral’ level to slow demand. He reiterated expectations for further 50bp hikes at the next two meetings in June and July, and left the door open for further half-point increases if needed.
Data released earlier this morning showed UK annual CPI inflation rising from 7.0% to 9.0% in April, slightly below expectations for 9.1% (the first undershoot in seven months) but nevertheless the highest since the CPI series began. The old RPI measure increased to a forty-year high of 11.1%. The rises were driven primarily by the sharp increase in the Ofgem energy price cap. Food and restaurant prices were also among items providing a big positive contribution. The annual rate for core CPI inflation (excluding food and energy) rose to 6.2% from 5.7%. A further significant increase in the energy price cap could push overall inflation to a new high later this year.

Inflation figures for April will also be released for the Eurozone and Canada later today. In the case of the Eurozone, they are final readings and are expected to confirm preliminary estimates showing a rise to 7.5% for headline CPI and 3.5% for core CPI excluding food and energy. Despite uncertainties about the economic outlook following Russia’s invasion of Ukraine, there have been calls from a growing number of ECB policymakers for interest rate ‘lift-off’ in July. In Canada, annual headline CPI inflation is expected to stay at 6.7%, maintaining pressure on the Bank of Canada to raise interest rates further. After hiking by 50bp in April to 1%, another half-point increase is widely anticipated in June, with further hikes seen in the second half of the year.

The impact of higher interest rates on the US housing sector will be closely watched. Expect this afternoon’s housing starts and building permits data for April to show falls. The Fed’s Harker is scheduled to discuss the economic outlook, with interest rates expected to be raised by 50bp at the next two monetary policy meetings in June and July to bring the upper end of the target range for the fed funds rate to 2%. The big uncertainty is whether rates to have to be increased above ‘neutral’ (estimated to be 2-3%) to slow demand and tame inflation.